Euro takes centre stage in quiet currency markets

The euro remains firmly ‘centre-stage’ in quiet summer holiday marked markets but the more positive noises coming out of various euro zone capitals has helped it surge to a seven-week high on Tuesday against the basket of sixteen most actively traded currencies in the market.

Speculation that the European Central Bank (ECB) will take action to help the struggling economies in the periphery of the euro zone has helped lower Spanish and Italian borrowing costs in the bond markets.

At the weekend, a report in Germany’s Der Spiegel magazine said the ECB planned to put a cap on Spanish and Italian bond yields. ECB officials have since vigorously denied the reports stating that these reports are “absolutely misleading.”

Today sees the first of three critical meetings for Greek Prime Minister Antonis Samaras. It is thought that Samaras will ask for more time, possibly as much as a further two years for the Greek government to comply with the terms of the bailout. According to sources from the Greek online newspaper ekathimerini, the coalition government would pass spending cuts in several phases “in order to ease the political impact of the unpopular measures.”

Greek Finance Minister Yannis Stournaras has already presented a plan aimed at cutting €13.5 billion in expenditures over the next two years after coming to the conclusion that the original €11.5 billion demanded by the Troika (a team of financial inspectors representing the European Commission, European Central Bank and the International Monetary Fund) would lead to a €2 billion budget shortfall.

Samaras plans to present the measures throughout this week as he meets, first, with Eurogroup president Jean-Claude Juncker in Athens today, followed by meetings with German Chancellor Angela Merkel on Friday and French President Françoise Hollande on Saturday.

In Germany, Michael Meister, the Christian Democrat Union (CDU) deputy leader on the Bundestag said that economic changes in Greece are too slow and that the Greek government must next month consider whether it stays on the euro. He was however contradicted by his own party’s spokesman for budgetary affairs in Parliament, Norbert Barthle who seemed more willing to give in on certain issues: “Small concessions are feasible provided they are strictly made within the framework of the second aid program. For instance, the interest and maturity on loans could be adjusted, as in the case of the first aid package,” he said.

In Spain, its treasury raising slightly more than the top end of its expectations at €4.515 billion in 12 and 18-month bills at its latest bond auction, selling €3.533 billion in 12-month bills at a maximum yield of 3.207% compared to 3.99% at the previous auction held on 17 July. It also issued €982 million in 18-month bills at a maximum yield of 3.45% versus 4.35% in July.

RBC Capital Markets analyst Peter Schaffrik told BloombergTV that this latest outcome shows that the Spanish situation is not as bad as markets believe.

In the UK, the Office for National Statistics (ONS) reported that the Public Sector Borrowing Requirement (PSBR) was £ 0.6 billion in July 2012, a much higher level of government borrowing than had been forecast in a month that normally bring in tax revenues that are surplus to requirements.

Disappointing corporation tax revenues together with weak receipts from the oil and gas sectors were responsible for much of the revenue drop in the July borrowing data.